Common accounting questions asked by medical contractors

New General Practitioners, doctors or medical contractors often have a range of accounting and business related questions after going out as a contractor. Over time we have noticed some important questions that often come up.

The questions and their answers are as follows:

Do I need to set up a company or can I trade as a sole trader?

There is no requirement from the IRD to set up as a company prior to getting paid as a contractor for your medical services. Even though a company has a different tax rate to people who are on the top income tax rate, there are rules in place to prevent most high income earners from using a company to avoid the top tax bracket (these are called the “attribution rules”).  

Usually the main reason for a business person to set up a company is to limit their personal financial liability in the event that their business gets into difficulty. A GP contractor has limited exposure to financial risks. Our understanding is that a company is of no use to a doctor in the event of clinical errors so it is important to have indemnity cover.

In the interest of having an easy life and to reduce costs with accountants and lawyers, we recommend contracting using your own IRD number. This is called trading as a “sole trader”.

What is provisional tax and should I be paying it?

If you are an established GP or medical professional it is likely that you will already understand the routine of provisional tax payments. For a new GP, provisional tax can be a bit confusing!

Provisional tax is a system for paying income tax in the year in which the income is earned. Your tax return for the year is then a “wash up” of the tax on the income you have earned for the year less the provisional tax you have paid during the year.

You will not be required to pay provisional tax until you have filed your first tax return as a contractor. It is good practice to keep about 30% of your income aside for your taxes in that first year.

If you earn over $200,000 per year, you would do well to make some voluntary payments of provisional tax to the IRD. This is because the IRD charges interest back to the provisional tax dates in some situations. If you expect your income to be in this bracket please let us know.

Once your first tax return has been filed you will be required to pay provisional tax in instalments during the year. The standard instalment dates are 28th August, 15th January and 7th of May (but these dates may be different depending on your specific situation).

Often we recommend using the Xero accounting software to keep track of your contracting income and expenses. Xero helps to give an accurate picture of profit as the year unfolds.

Which expenses can I claim to reduce my tax bill?

One of the reasons that GPs are happy to work as a contractor instead of requesting an employment contract under the PAYE system is the ability to claim some expenses to reduce your overall tax bill.

Expenses that can be claimed are anything that directly relates to your practice, such as memberships with Medical Protection Society or the Royal New Zealand College of General Practitioners, equipment like a stethoscope or a dermatoscope as well as training and professional development expenses.

If you have an area set aside in your home where you do paperwork after hours as well as reading and study then you will also be able to claim a portion of your home costs to offset some of your tax bill.

Many new GP contractors ask if they can claim their vehicle expenses. Unfortunately, unless your role involves travel from your clinic to see people in the community then vehicle expenses will generally not be deductible on the basis that travel from home to work is considered to be private.

What are ACC levies and how do they work?

As you will be aware, ACC provides personal injury cover for all New Zealand citizens, residents and temporary visitors to New Zealand.  

Whether you use a sole trader structure or you contract through a company you will be required to pay ACC levies. Employees have ACC deducted as part of the PAYE system. These levies will be calculated by the ACC and invoiced to you after you file your first income tax return. Your bill for ACC will be about $1,400 per year if you earn more than about $120,000pa.

There is an alternative option to agree a level of ACC cover in advance with the ACC and pay levies based on that agreed income levy. This scheme is called ACC CoverPlus Extra. Some people use CoverPlusExtra to reduce the amount that they pay the ACC, then use the savings to pay for private income protection insurance. If you would like some advice from an insurance broker let us know and we can pass you on some contact details.

What is the best way for me to prepare GST returns and income tax returns?

There is no prescribed method for completing the information required to file tax returns for the IRD. For people who work for only one practice and who are not required by that practice to provide an invoice it is often simplest not to use any accounting software.

As the complexity of your work increases (e.g. multiple employers) then having accounting software like Xero would be a real timesaver.

Some people who have a simple situation still prefer to use Xero as it makes their life easier!

At a minimum, we recommend keeping a separate bank account for contracting income and expenses (funds can be transferred out to your personal account). Doing this makes it easier to keep track of all business related transactions.